Attachment

11th Edition
Chapter 3
McGrawHill/Irwin Copyright © 2006, The McGrawHill Companies, Inc.
Systems Design:
Job-Order Costing
Chapter Three
Types of Product Costing Systems
Process Job-order
Costing Costing

 AA company
company produces
produces many
many units
units of
of aa single
single
product.
product.

 One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable fromfrom
other
other units
units of
of product.
product.

 The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
Process Job-order
Costing Costing

 AA company
company produces
produces many
many units
units of
of aa single
single
product.
Example companies:
product.
 1.One
 Weyerhaeuser
One unit
unit of (paper
of product
product is manufacturing) from
is indistinguishable
indistinguishable from
other
other2.units of
of product.
Reynolds
units Aluminum (refining aluminum ingots)
product.
 3.The
 Coca-Cola
The identical(mixing
identical nature and
nature of bottling
of each
each unit beverages)
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
Process Job-order
Costing Costing

 Many
Many different
different products
products are
are produced
produced each
each period.
period.

 Products
Products are
are manufactured
manufactured to
to order.
order.

 The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.
Process Job-order
Costing Costing

 Many
Many different
different products
products are
are produced
produced each
each period.
period.
Example companies:

 1.Products
Products are
are manufactured
manufactured
Boeing (aircraft to
to order.
manufacturing)
1. Boeing (aircraft manufacturing) order.

 2.The unique
Bechtel
The nature
nature ofof each
International
unique (large
each order requires
scale
order tracing
tracing or
construction)
requires or
3.allocating
allocating costs
Walt Disneycosts to
to each
Studioseach job,
job, and
(movie and maintaining
maintaining cost
production) cost
records for each job.
records
records for
for each
each job.
job.
Comparing Process and Job-Order Costing
Quick Check 
Which
Which of of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company forfor Kleenex.
Kleenex.
b.
b.Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder ofof commercial
commercial fishing
fishing vessels.
vessels.
Quick Check 
Which
Which of of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company forfor Kleenex.
Kleenex.
b.
b.Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder ofof commercial
commercial fishing
fishing vessels.
vessels.
Direct Manufacturing Costs
Charge
Charge
Direct
DirectMaterials
Materials
Job direct
direct
JobNo.
No.11
material
material and
and
Direct
DirectLabor
Labor direct
direct labor
labor
Job
JobNo.
No.22
costs
costs toto
each
each job
job as
as
Manufacturing
Manufacturing Job
JobNo.
No.33 work
work isis
Overhead
Overhead
performed.
performed.
Direct Manufacturing Costs
Manufacturing
Manufacturing
Overhead,
Overhead,
Direct
DirectMaterials
Materials including
including
Job
JobNo.
No.11
indirect
indirect
Direct
DirectLabor
Labor
materials
materials and and
Job
JobNo.
No.22 indirect
indirect labor
labor,,
are
are allocated
allocated to to
Manufacturing
Manufacturing Job jobs
jobs rather
rather than
than
JobNo.
No.33
Overhead directly
Overhead directly traced
traced
to
to each
each job.
job.
Job-Order Cost Accounting
PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Materials Requisition Form
Will E. Delite
Employee Time Ticket
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that

are in process. An allocation base, such as
direct labor hours, direct labor dollars, or
machine hours, is used to assign
manufacturing overhead to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
Manufacturing Overhead Application
The predetermined overhead rate (POHR)

used to apply overhead to jobs is
determined before the period begins.
Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period
Ideally,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.
The Need for a POHR
Using a predetermined rate makes it

possible to estimate total job costs sooner.
Actual overhead for the period is not

known until the end of the period.
Application of Manufacturing Overhead
Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.
Overhead applied = POHR × Actual activity
Actual
Actual amount
amount ofof the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.
Overhead Application Rate
Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period
$640,000
POHR =
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For
For each
each direct
direct labor
labor hour
hour worked
worked on on aa
particular
particular job,
job, $4.00
$4.00 ofof factory
factory overhead
overhead
will
will be
be applied
applied toto that
that job.
job.
Interpreting the Average Unit Cost
The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit

were produced, so the incremental cost of
another unit may be somewhat less than $118.
Quick Check 
Job
Job WR53
WR53 at at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. What
What would
would be
be
recorded
recorded asas the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
Quick Check 
Job
Job WR53
WR53 at at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. What
What would
would be
be
recorded
recorded asas the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
Job-Order Costing
Document Flow Summary
Let’s summarize
the document flow
in a job-order
costing system.
Job-Order Costing
A
A sales
sales order
order isis the
the AA production
production
basis
basis of
of issuing
issuing aa order
order initiates
initiates
production
production order.
order. work
work on
on aa job.
job.
Job-Order Costing
Materials
Materialsused
used
may
maybebeeither
either Direct Job
Job Cost
Cost
direct
director
or materials Sheets
Sheets
indirect.
indirect.
Materials
Materials
Requisition
Requisition
Manufacturing
Manufacturing
Indirect
Overhead
Overhead
materials
Account
Account
Job-Order Costing
An
Anemployee’s
employee’s
time
timemay
maybe beeither
either Direct Job
Job Cost
Cost
direct
direct or
orindirect.
indirect. Labor Sheets
Sheets
Employee
EmployeeTime
Time
Ticket
Ticket
Manufacturing
Manufacturing
Indirect
Overhead
Overhead
Labor
Account
Account
Job-Order Costing
Employee
Employee Indirect
Time
TimeTicket
Ticket Labor
Other
Other Manufacturing
Manufacturing Applied Job
Job Cost
Cost
Actual
ActualOH
OH Overhead
Overhead Overhead Sheets
Sheets
Charges
Charges Account
Account
Materials
Materials Indirect
Requisition
Requisition Material
Job-Order System Cost Flows
Let’s examine the

cost flows in a
job-order costing
system.
Raw Materials Work in Process

Material Direct
 (Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
Materials
Mfg. Overhead
Actual Applied
Indirect
Materials
Cost Flows – Material Purchases
Raw material purchases are recorded in an

inventory account.
Cost Flows – Material Usage
Direct materials issued to a job increase Work in

Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct
Labor Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Cost Flows – Labor
The cost of direct labor incurred increases Work in

Process and the cost of indirect labor increases
Manufacturing Overhead.

Labor
Indirect
Materials
Direct
Labor Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
McGrawHill/Irwin
Overhead Copyright © 2006, The McGrawHill Companies, Inc.
Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor,

other manufacturing overhead costs are charged to
the Manufacturing Overhead account as they are
incurred.

Labor
Indirect
Materials
Direct
Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
IfIf actual
actual and
and applied
applied
Materials Overhead
Indirect
manufacturing
manufacturing overhead
overhead
Applied to are
are notnot equal,
equal, aa year-end
year-end
Labor Work in adjustment
Other adjustment is is required.
required.
Process
McGrawHill/Irwin
Overhead Copyright © 2006, The McGrawHill Companies, Inc.
Cost Flows – Overhead Applied
Work in Process is increased when

Manufacturing Overhead is applied to jobs.
Nonmanufacturing Cost Flows
Nonmanufacturing costs are not assigned to

individual jobs, rather they are expensed in the
period incurred.
Examples:
Examples:
1.
1. Salary
Salary expense
expense of of employees
employees
that
that work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
2.
2. Advertising
Advertising expenses
expenses areare expensed
expensed
in
in the
the period
period incurred.
incurred.
Nonmanufacturing Cost Flows
Nonmanufacturing costs (period expenses) are

charged to expense as they are incurred.
Work in Process Finished Goods

(Job Cost Sheet)
 Direct Cost of

Cost of Goods
Materials
Direct
Goods Mfd.
Mfd.
Labor
Overhead
Applied
Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods

Manufactured is transferred to Finished Goods
from Work in Process.
Work in Process Finished Goods

(Job Cost Sheet)
 Direct Cost of
  Cost of
Cost of Goods Goods
Materials
Direct
Goods Mfd. Sold
Mfd.
Labor
Overhead
Applied Cost of Goods Sold

Cost of
Goods
Sold
Cost Flows – Sales
When finished goods are sold, two entries are

required: (1) to record the sale, and (2) to
record COGS and reduce Finished Goods.
Defining Under- and Overapplied Overhead
The difference between the overhead cost applied to

Work in Process and the actual overhead costs of a
period is termed either underapplied or overapplied
overhead.
Underapplied overhead Overapplied overhead

exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
Overhead Application Example
PearCo’s
PearCo’s actual
actual overhead
overhead forfor the
the year
year was
was
$650,000
$650,000 with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor
hours
hours worked
worked on on jobs.
jobs.
How
How much
much total
total overhead
overhead was was applied
applied toto
PearCo’s
PearCo’s jobs
jobs during
during the
the year?
year? Use
Use
PearCo’s
PearCo’s predetermined
predetermined overhead
overhead rate
rate ofof
$4.00
$4.00 per
per direct
direct labor
labor hour.
hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Overhead Application Example
PearCo’s
PearCo’s actual
actual overhead
overhead for for the
the year
year was
was
$650,000
$650,000 with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor
hours
hours worked
worked on on jobs.
jobs.
PearCo has overapplied
How
How much
much total
total overhead
overhead was
was applied
applied to
to
overhead for the year
PearCo’s
PearCo’s jobs
jobs during
during the
the year?
year? Use
Use
by $30,000. What will
PearCo’s
PearCo predetermined
PearCo’s predetermined overhead
do? overhead rate
rate ofof
$4.00
$4.00 perper direct
direct labor
labor hour.
hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Quick Check 
Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
overhead
costs
costs ofof $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead raterate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tiger’s
Tiger’s manufacturing
overhead is
is
a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
overapplied.
d.
d. $60,000
underapplied.
Quick Check 
Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
overhead
costs
costs ofof $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead raterate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine
Overhead hours
hours during
OverheadApplied
Applied during thethe
period.
period. Tiger’s
Tiger’s manufacturing
$4.00
manufacturing peroverhead
$4.00per hour is
hour××290,000
overhead ishours
290,000 hours
== $1,160,000
$1,160,000
a.
a. $50,000
overapplied.
Underapplied
UnderappliedOverhead
Overhead
b. $50,000 $1,210,000
underapplied.$1,210,000--$1,160,000
$1,160,000
b. $50,000 underapplied. == $50,000
$50,000
c.
c. $60,000
overapplied.
d.
d. $60,000
underapplied.
Disposition of Under- or Overapplied Overhead
PearCo’s
PearCo’s Method
Method
$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work
Work in
in Finished
Finished
Process
Process Goods
Goods
Cost
Cost of
of Cost
Cost of
of
Goods
Goods Sold
Sold Goods
Goods Sold
Sold
Disposition of Under- or Overapplied Overhead
PearCo’s Cost PearCo’s

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
Allocating Under- or Overapplied
Overhead Between Accounts
Assume the overhead applied in ending Work in

Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
We would complete the following allocation of

$30,000 overapplied overhead:
Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCo’s
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
Quick Check 
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCo’s
PearCo’s netnet operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Quick Check 
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCo’s
PearCo’s netnet operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Multiple Predetermined Overhead Rates
To this point we have assumed that there is a

single predetermined overhead rate called a
plantwide overhead rate.
Large companies May be more

often use multiple complex but . . .
predetermined
overhead rates. May be more
accurate because it
reflects differences
across departments.
Job-Order Costing in Service Companies
Job-order costing is used in many

difference types of service companies.
The Use of Information Technology
Technology plays an important part in many

job-order cost systems. When combined with
Electronic Data Interchange (EDI) or a web-
based programming language called
Extensible Markup Language (XML), bar
coding eliminates the inefficiencies and
inaccuracies associated with manual clerical
processes.
Appendix 3a
The Predetermined Overhead

Rate & Capacity
Predetermined Overhead Rate and Capacity
Calculating
Calculating predetermined
overhead rates
rates using
using
an
an estimated,
estimated, or
or budgeted
budgeted amount
amount of of the
the
allocation
allocation base
base has
has been
been criticized
criticized because:
because:
1.
1. Basing
Basing the
the predetermined
overhead rate
rate upon
upon
budgeted
budgeted activity
activity results
results in
in product
product costs
costs that
that
fluctuate
fluctuate depending
depending upon
upon thethe activity
activity level.
level.
2.
2. Calculating
Calculating predetermined
predetermined rates
rates based
based upon
upon
budgeted
budgeted activity
activity charges
charges products
products for
for costs
costs that
that
they
they do
do not
not use.
use.
Capacity-Based Overhead Rates
Criticisms
Criticisms can
can bebe overcome
overcome byby using
using
estimated
estimated total
total units
units in
in the
the allocation
allocation base
base at
at
capacity
capacity inin the
the denominator
denominator of of the
the
predetermined
overhead rate
rate calculation.
calculation.
Let’s look at the difference!
An Example
Equipment is leased for $100,000 per year.

Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
An Example
Equipment is leased for $100,000 per year.

Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
Traditional $100,000
= = $2.50 per unit
Method 40,000
Capacity $100,000
= = $2.00 per unit
Method 50,000
Quick Check 
Crest
Crest Winery
Winery in in Woodinville
Woodinville leases
leases an
an automatic
automatic
corking
corking machine
machine forfor $100,000
$100,000 perper year.
year. IfIf run
run at
at
full
full capacity,
capacity, itit can
can cork
cork 50,000
50,000 cases
cases ofof wine
wine
per
per year.
year. The
The company
company estimates
estimates 40,000
40,000 cases
cases
of
of wine
wine will
will be
be produced
produced and
and sold
sold next
next year.
year.
What
What is is the
the predetermined
overhead raterate based
based
on
on the
the estimated
estimated number
number of of cases
cases ofof wine?
wine?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 perper case.
case.
Quick Check 
Crest
Crest Winery
Woodinville leases
leases an
an automatic
automatic
corking
corking machine
machine forfor $100,000
$100,000 perper year.
year. IfIf run
run at
at
full
full capacity,
capacity, itit can
can cork
cork 50,000
50,000 cases
cases ofof wine
wine
per
per year.
year. The
The company
company estimates
estimates 40,000
40,000 cases
cases
of
of wine
wine will
will be
be produced
produced and
and sold
sold next
next year.
year.
What
What is is the
the predetermined
overhead raterate based
based
on
on the
the estimated
estimated number
number of of cases
cases ofof wine?
wine?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 perper case.
case.
Quick Check 
Crest
Crest Winery
Woodinville leases
leases an
an automatic
automatic
corking
corking machine
machine for for $100,000
$100,000 per
per year.
year. IfIf run
run at
at
full
full capacity,
capacity, itit can
can cork
cork 50,000
50,000 cases
cases of
of wine
wine
per
per year.
year. The
The company
company estimates
estimates 40,000
40,000 cases
cases
of
of wine
wine will
will be
be produced
produced and and sold
sold next
next year.
year.
What
What is is the
the predetermined
overhead rate
rate based
based
on
on the
the number
number of of cases
cases of
of wine
wine at
at capacity?
capacity?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 perper case.
case.
Quick Check 
Crest
Crest Winery
Woodinville leases
leases an
an automatic
automatic
corking
corking machine
machine for for $100,000
$100,000 per
per year.
year. IfIf run
run at
at
full
full capacity,
capacity, itit can
can cork
cork 50,000
50,000 cases
cases of
of wine
wine
per
per year.
year. The
The company
company estimates
estimates 40,000
40,000 cases
cases
of
of wine
wine will
will be
be produced
produced and and sold
sold next
next year.
year.
What
What is is the
the predetermined
overhead rate
rate based
based
on
on the
the number
number of of cases
cases of
of wine
wine at
at capacity?
capacity?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 perper case.
case.
Quick Check 
When
When capacity
capacity is is used
used in
in the
the denominator
denominator in in the
the
predetermined
predetermined rate, rate, what
what happens
happens to to the
the
predetermined
predetermined overhead overhead rate
rate as
as estimated
estimated
activity
activity decreases?
decreases?
a.
a.The
The predetermined
overhead rate
rate goes
goes up
up when
when
activity
activity goes
goes down.
down.
b.
b.The
The predetermined
overhead rate
rate stays
stays the
the
same;
same; itit isis not
not affected
affected by
by changes
changes in in activity.
activity.
c.
c.The
The predetermined
overhead rate
rate goes
goes down
down
when
when activity
activity goes
goes down.
down.
Quick Check 
When
When capacity
capacity is is used
used in
in the
the denominator
the
predetermined
predetermined rate, rate, what
what happens
happens to to the
the
predetermined
predetermined overhead overhead rate
rate as
as estimated
estimated
activity
activity decreases?
decreases?
a.
a.The
The predetermined
overhead rate
rate goes
goes up
up when
when
activity
activity goes
goes down.
down.
b.
b.The
The predetermined
overhead rate
rate stays
stays the
the
same;
same; itit isis not
not affected
affected by
by changes
activity.
c.
c.The
The predetermined
overhead rate
rate goes
goes down
down
when
when activity
activity goes
goes down.
down.
Quick Check 
When
When estimated
estimated activityactivity is
is used
used in
in the
the
denominator
the predetermined
predetermined rate,rate, what
what
happens
happens to to thethe predetermined
overhead rate rate as
as
estimated
estimated activity
activity decreases?
decreases?
a.The
a.The predetermined
predetermined overheadoverhead rate
rate goes
goes upup when
when
activity
activity goes
goes down.down.
b.The
b.The predetermined
rate stays
stays the
the
same;
same; itit isis not
not affected
affected by
by changes
activity.
c.The
c.The predetermined
overhead rate
rate goes
goes down
down
when
when activity
activity goesgoes down.
down.
Quick Check 
When
When estimated
estimated activityactivity is
is used
used in
in the
the
denominator
the predetermined
predetermined rate,rate, what
what
happens
happens to to thethe predetermined
overhead rate rate as
as
estimated
estimated activity
activity decreases?
decreases?
a.The
a.The predetermined
rate goes
goes upup when
when
activity
activity goes
goes down.down.
b.The
b.The predetermined
rate stays
stays the
the
same;
same; itit isis not
not affected
affected by
by changes
activity.
c.The
c.The predetermined
overhead rate
rate goes
goes down
down
when
when activity
activity goesgoes down.
down.
Basing the rate on capacity
Actual volume 40,000 cases

Selling price $40.00 per case
Variable production cost $24.00 per case
Fixed manufacturing overhead $100,000 per year
Capacity 50,000 cases
Predetermined overhead rate $2.00 per case
Fixed selling and admin. expense $500,000 per year
Revenue $ 1,600,000
Cost of goods sold 1,040,000
Gross margin 560,000
Cost of idle capacity 20,000
Selling and admin. expense 500,000
Net operating income $ 40,000
Basing the rate on expected volume
Actual volume 40,000 cases

Selling price $40.00 per case
Variable production cost $24.00 per case
Fixed manufacturing overhead $100,000 per year
Expected volume 40,000 cases
Predetermined overhead rate $2.50 per case
Fixed selling and admin. expense $500,000 per year
Revenue $ 1,600,000
Cost of goods sold 1,060,000
Gross margin 540,000
Cost of idle capacity -
Selling and admin. expense 500,000
Net operating income $ 40,000
End of Chapter 3

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11th Edition

PearCo Job Cost Sheet

Cost Summary Units Shipped

Manufacturing overhead is applied to jobs that

The predetermined overhead rate (POHR)

Estimated total manufacturing

Using a predetermined rate makes it

Actual overhead for the period is not

Overhead applied = POHR × Actual activity

Estimated total manufacturing

POHR = $4.00 per DLH

The average unit cost should not be interpreted

Fixed overhead would not change if another unit

Let’s examine the

Raw Materials Work in Process

Raw material purchases are recorded in an

Direct materials issued to a job increase Work in

Salaries and Work in Process

The cost of direct labor incurred increases Work in

Salaries and Work in Process

In addition to indirect materials and indirect labor,

Salaries and Work in Process

Work in Process is increased when

Nonmanufacturing costs are not assigned to

Nonmanufacturing costs (period expenses) are

Work in Process Finished Goods

As jobs are completed, the Cost of Goods

Work in Process Finished Goods

Applied Cost of Goods Sold

When finished goods are sold, two entries are

The difference between the overhead cost applied to

Underapplied overhead Overapplied overhead

$30,000 $30,000 may be

PearCo’s Cost PearCo’s

Assume the overhead applied in ending Work in

We would complete the following allocation of

UNDERAPPLIED INCREASE INCREASE

OVERAPPLIED DECREASE DECREASE

To this point we have assumed that there is a

Large companies May be more

Job-order costing is used in many

Technology plays an important part in many

The Predetermined Overhead

Let’s look at the difference!

Equipment is leased for $100,000 per year.

Equipment is leased for $100,000 per year.

Actual volume 40,000 cases

Actual volume 40,000 cases

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